Eighty-three-year-old bear warns — again — that the end is near

From John Cassidy’s “Is the Plunge in the Nasdaq and Bitcoin the End of a ‘Superbubble’?” posted Monday in the New Yorker:

Most investment managers tend to give their clients upbeat messages that play up opportunities to make money in the markets. Jeremy Grantham, the eighty-three-year-old co-founder of G.M.O., a Boston-based investment firm, does the opposite. “The long, long bull market since 2009 has finally matured into a fully-fledged epic bubble,” he warned, at the start of 2021. “Featuring extreme overvaluation, explosive price increases, frenzied issuance, and hysterically speculative investor behavior, I believe this event will be recorded as one of the great bubbles of financial history, right along with the South Sea Bubble, 1929, and 2000.” Grantham conceded that it is difficult to predict when a speculative bubble will burst. But, after citing some of the market action in the previous twelve months, including the huge run-up in Tesla, he advised his clients to be cautious, adding: “at some future date, whenever that may be, it will have paid for you to have ducked from midsummer of 2020.”

After Grantham issued this warning, the S. & P. 500 jumped another twenty-seven per cent in 2021, and the Nasdaq index rose by twenty-one per cent. By the start of 2022, a hypothetical investor who had taken Grantham’s advice to sell in the summer of 2020 would have missed a rise in the S. & P. 500 of more than fifty per cent and vast profits. Was Grantham mistaken, then, in issuing his dire warning? Or was he merely early? Between its January peak and the close of trading last Friday, the S. & P. 500 tumbled about 8.3 per cent, and the Nasdaq fell about thirteen per cent. In the same period, the VIX index, which tracks expected volatility and serves as Wall Street’s fear index, shot up about seventy-three per cent. The value of Bitcoin, which boosters call an alternative currency, but which trades more like an inverse-fear index, has plunged by about twenty-five per cent this month.

If Grantham’s warnings are well founded, the stock-market correction could mark the beginning of something much bigger and far more damaging. In his latest market commentary, which G.M.O. posted on its Web site on January 20th, Grantham wrote that the stock-market bubble he’d identified last January had turned into a “superbubble,” which also encompassed bonds, real estate, and, increasingly, commodities. “What is new this time, and only comparable to Japan in the 1980s, is the extraordinary danger of adding several bubbles together, as we see today with three and a half major asset classes bubbling simultaneously for the first time in history,” Grantham declared. “When pessimism returns to markets, we face the largest potential markdown of perceived wealth in U.S. history.” For stock valuations to revert to historical trends, the S. & P. 500 would have to fall all the way to twenty-five hundred, he argued, which would imply a further drop of more than forty per cent.

My take: If you missed a 50% rise following Grantham’s advice in 2021, why not double down in 2022? After all, a doomsday clock will eventually show the correct time.

13 Comments

  1. Fred Stein said:
    There are clear cases of assets that rely solely on the “bigger fool”, i.e., a future investor to provide return to the current investor. Those assets will collapse in some way, as we’re already seeing.

    Apple, the safe haven, may be impacted a bit more. It may last a while due to macro factors. Meanwhile buybacks and organic growth. No worry.

    0
    January 24, 2022
  2. David Emery said:
    But the other side of the equation is significant. After this 40% drop, what does the recovery curve look like? 70s stagflation or 2001/2009?

    0
    January 24, 2022
  3. bas flik said:
    inflation is caused by goverments paying covid checks while there is no production. printing money and no real economy produced. classic example of inflation. this will disappear when production will start up again. raising interest rates will result in collapse of the west. which president wants to be accountable for that?

    4
    January 24, 2022
    • John Konopka said:
      Maybe. In this case it looks like the pandemic caused spending to shift from services to goods. This combined with COVID induced slowdowns in some factories caused a disruption in the supply chains for all sorts of goods as well as bottlenecks in our ports of entry.

      It is not clear that we are seeing broad inflation. Some prices are up, some down. More are up than down causing core inflation to rise. I’m not sure how we get out of this. Probably the supply chain and delivery chain will slowly adapt

      0
      January 24, 2022
  4. There are always bubbles about to burst in market segments. Is the price of gold absurdly high? The meme stock bubble was certain to pop. Enthusiasm for cruise ships, airlines & hotels may have been premature. Crypto looks absolutely bubblishous but a new bubble may form from the remains of the last. If the underlying assets or perceived future sales don’t support the price, pop goes the weasel. Peloton like.
    In truth the baby always remains after the bath water drains. A firm with growing sales of profitable products & services seldom sees shares fall very far for very long. Reporting record earnings in the middle of a perceived crisis, priceless! Even record earnings will get the share price temporarily punished if no future numbers are devined.
    I do wonder why maelstroms erupt on cue just before Apple earnings. Steady markets for weeks then here comes earnings season, let’s all have a convenient sell-off until the dust settles after Earnings.

    6
    January 24, 2022
  5. Jerry Doyle said:
    The U.S. economy is strong. Chair Powell is more dovish than folk understand. Industries and big businesses are poised for historical expansion. Apple is firing on all cylinders. The horizon for a strong economy and the brightest of future for Apple never appeared so certain as now. Buy as many shares of Apple as possible if you have discretionary funds on hand to do so.

    7
    January 24, 2022
  6. Robert Paul Leitao said:
    Tough days for those who were making use of margin. Market pullbacks happen much faster than in years past and the recoveries occur much more quickly as well. Quality matters. Some will learn the market isn’t a video game after all while others will make judicious use of cash and selectively purchase shares in high quality enterprises that are oversold.

    3
    January 24, 2022
  7. Robert Paul Leitao said:
    Quality matters. I’ve been cautioning about the rising opportunity costs in the market as the Fed brings QE to an end and signals interest rate increases this year. As much as the seemingly abrupt pullback is unpleasant and the depth of the pullback can be a cause for concern, enterprises with economic moats, strong balance sheets and pricing control in their primary product and services markets will see their share prices rebound in time. Like I said, quality matters.

    2
    January 24, 2022
  8. Aaron Belich said:
    This is where we’ll find out how much Wallstreet has dumped into crypto scams as the smart money heads for the exits ala 2007.

    0
    January 24, 2022
  9. John Konopka said:
    It seems an exaggeration to call this a super bubble. Maybe the market is ahead of itself somewhat. Bubbles are extreme situations. I recall a time (1999?) when a technology mutual fund doubled in a short time (one quarter? One month?). That was a bubble. That was nuts. I looked at that and knew it wasn’t normal. Should have sold everything but I was too busy with life.

    There may be some individual smaller bubbles going on now, perhaps there always are. Tesla and bitcoin come to mind. Netflix has already given back two years of gains.

    Apple, Microsoft, Facebook, Amazon have high valuations as a group but they are also producing a ton of revenue.

    This doesn’t feel like the late 90s when all sorts of internet companies popped up with huge valuations and no profits. That was a bubble. Even so, I’m inclined to criticize too harshly. It seems like what happens when a new area opens up. A lot of money rushes in, much of it is lost, eventually a small number of successful companies emerge. Fortunes are won and lost. Life goes on.

    0
    January 24, 2022
    • Robert Paul Leitao said:
      Thank you, John! No. It’s not a bubble. It’s a quick re-valuation in the market following the end of the tax year, discounting of prices due to higher interest rates and rebalancing of portfolios as some assets move out of equities. It’s a rude awakening for those who expected prices to only move up and a reminder speculative equities trading at very high multiples or no multiples at all due to the absence of profits are a real risk for investors.

      0
      January 24, 2022
  10. Michael Goldfeder said:
    The Dow had about a 1270 point swing today before closing up 99 points. From my perspective, shaped by Richard Ney’s analysis of how the NYSE floor specialists and insiders at the inner sanctum operated way back before trades were done all electronically, this was a classic knock out the stop limit orders and begin the carnage with a precipitous decline while margin calls do the rest. Then Boom! The Dow moves higher right before the close! I’ve seen this movie over and over again.

    After the bell, IBM reported better than expected revenues and earnings and is up $6.50 AH. The big boys also will be reporting this week, so this was the last chance to drive down the Dow and NASDAQ before earnings season begins in full.

    That’s why it’s important to invest in solid companies that have EARNINGS!!!

    0
    January 24, 2022

Leave a Reply